1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q/A
(Amendment No. 1)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File No. 0-18492
DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4041-F Hadley Road, South Plainfield, NJ 07080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 561-1200
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
13,759,464 Common Shares, par value $.001 per share were outstanding as of June
30, 1995.
Page 1 of 14
2
FORM 10-Q
DIGITAL SOLUTIONS, INC.
June 30, 1995
INDEX
Page No.
--------
Part I - Financial Information
------------------------------
Consolidated Balance Sheets
June 30, 1995 (unaudited) and
September 30, 1994 3
Consolidated Statements of
Operations for the three months ended
June 30, 1995 and 1994 (Unaudited) 4
Consolidated Statements of
Operations for the nine months ended
June 30, 1995 and 1994 (Unaudited) 5
Consolidated Statement of Shareholder's Equity
for the nine months ended June 30,
1995 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1995
and 1994 (Unaudited) 7
Notes to consolidated financial statements
(Unaudited) 8
Management's discussion and analysis of
financial condition and results of operations 11
Signatures 14
Page 2 of 14
3
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, September 30,
1995 1994
(unaudited)
------------ -------------
Current assets:
Cash $ 285,000 $ 178,000
Accounts receivable, net of allowance
for doubtful accounts of $123,000 at June 30, 1995
and $99,000 at September 30, 1994 5,912,000 2,592,000
Current portion of notes due from officers (Note 3) 702,000 140,000
Deferred tax asset 300,000 300,000
Other current assets 1,128,000 500,000
----------- ----------
Total current assets 8,327,000 3,710,000
Equipment and improvements:
Machinery and equipment 2,708,000 2,231,000
Leasehold improvements 177,000 177,000
----------- ----------
2,885,000 2,408,000
Less accumulated depreciation and amortization 1,984,000 1,861,000
----------- ----------
901,000 547,000
Deferred tax asset, net of current portion 300,000 300,000
Goodwill, net of amortization (Note 2) 5,460,000 2,852,000
Other assets 1,391,000 318,000
----------- ----------
$16,379,000 $7,727,000
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving loan payable (Note 6) $ 3,130,000 $1,010,000
Current portion of long-term debt 644,000 165,000
Accounts payable 964,000 493,000
Accrued expenses and other current liabilities 2,165,000 896,000
----------- ----------
Total current liabilities 6,903,000 2,564,000
Subordinated debt (Note 4) 1,887,000 --
Long term debt, net of current portion 566,000 38,000
Other liabilities 55,000 69,000
----------- ----------
Total liabilities 9,411,000 2,671,000
Shareholders' equity
Common stock 14,000 12,000
Additional paid-in capital 8,081,000 6,839,000
Accumulated deficit (1,127,000) (1,795,000)
----------- ----------
6,968,000 5,056,000
----------- ----------
$16,379,000 $7,727,000
=========== ==========
See notes to consolidated financial statements
Page 3 of 14
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
June 30,
-----------------------------------------------
1995 1994
-------------- --------------
Operating revenues $ 19,841,000 $ 10,849,000
-------------- --------------
Direct costs 18,141,000 10,017,000
-------------- --------------
Gross profit 1,700,000 832,000
-------------- --------------
Selling, general and administrative 1,547,000 768,000
-------------- --------------
Net income from operations 153,000 64,000
-------------- --------------
Other credits (charges):
Interest and other income 32,000 16,000
Interest expense (100,000) (29,000)
-------------- --------------
(68,000) (13,000)
-------------- --------------
Income before income taxes 85,000 51,000
Income tax benefit/(expense) 61,000 93,000
-------------- --------------
Net income $ 146,000 $ 144,000
============== ==============
Net income per common share $ 0.01 $ 0.01
============== ==============
Weighted average number of
common shares outstanding 14,619,580 14,152,977
============== ==============
See notes to consolidated financial statements.
Page 4 of 14
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended
June 30,
--------------------------------------------
1995 1994
---- ----
Operating revenues $ 52,468,000 $ 26,335,000
-------------- --------------
Direct costs 47,709,000 24,092,000
-------------- --------------
Gross profit 4,759,000 2,243,000
-------------- --------------
Selling, general and administrative 4,035,000 1,929,000
-------------- --------------
Net income from operations 724,000 314,000
-------------- --------------
Other credits (charges):
Interest and other income 189,000 23,000
Interest expense (227,000) (55,000)
-------------- --------------
(38,000) (32,000)
-------------- --------------
Income before income taxes 686,000 282,000
Income tax benefit/(expense) (18,000) 293,000
-------------- --------------
Net income $ 668,000 $ 575,000
============== ==============
Net income per common share $ 0.05 $ 0.04
============== ==============
Weighted average number of
common shares outstanding 14,729,275 12,399,782
============== ==============
See notes to consolidated financial statements.
Page 5 of 14
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT STOCKHOLDER'S EQUITY
FOR THE PERIOD ENDED JUNE 30, 1995
(unaudited)
Common Stock
-------------------
Shares Additional
Issued Paid-in
(Retired) Amount Capital Deficit
---------- ------ --------- ----------
Balance, September 30, 1994 12,125,753 12,000 6,839,000 (1,795,000
Exercise of options in connection with employee
stock option plan. 1,266,596 1,265 737,000
Stock issued to satisfy debt on acquisition of
Staff Rx to Rads (the sellers) 360,000 360 743,000
Expenses related to private placement of common stock (164,000)
Stock issued to satisfy debt on acquisition of Turnkey Servcies, Inc
a Southwest leasing company 68,205 68 166,000
Stock reduced on acquisition of The Alternative Source (106,508) (106) (240,000)
Net income - - - 668,000
---------- ------ --------- ----------
Balance June 30, 1995 13,714,046 13,587 8,081,000 (1,127,000)
========== ====== ========= ==========
See notes to consolidated financial statements
Page 6 of 14
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
---------------------------
1995 1994
---- ----
Cash Flows from Operating Activities:
Net Income $ 668,000 $ 575,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred income taxes 18,000 (300,000)
Depreciation and amortization 339,000 198,000
Provision for doubtful accounts 24,000 16,000
Amortization of rent deferral (21,000) (21,000)
Changes in operating assets and liabilities
Increase in accounts receivable (3,466,000) (890,000)
Increase in other assets (1,158,000) (492,000)
Increase in notes due from officers (Note 3) (542,000) --
Increase in accounts payable,
accrued expenses and other current liabilities 2,305,000 1,004,000
------------ ----------
Net cash used in operating activities (1,833,000) 90,000
------------ ----------
Cash flows from Investing Activities:
Purchases of equipment and improvements (411,000) (177,000)
Collections on note receivable -- 109,000
Acquisition of Businesses (2,229,000) (871,000)
------------ ----------
Net cash used in investing activities (2,640,000) (939,000)
----------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised 737,000 189,000
Principal payments on long-term debt 1,887,000 600,000
Net proceeds from subordinated debt
Expenses related to issuance of common stock (164,000)
Net borrowings from (payments to) line of 2,120,000 (80,000)
credit/factor
Payment of dividends on preferred stock -- (98,000)
----------- ---------
Net cash provided by financing activities 4,580,000 611,000
----------- ---------
Net increase/(decrease) in cash 107,000 (238,000)
Cash at beginning of period 178,000 997,000
----------- ----------
Cash at end of period $ 285,000 $ 759,000
=========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 125,000 $ 49,000
============ ==========
See notes to consolidated financial statements.
Page 7 of 14
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1995
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normally recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine month
period ended June 30, 1995 are not necessarily indicative of the results that
may be expected for the year ended September 30, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
September 30, 1994.
NOTE 2: ACQUISITIONS
On November 21, 1994, the Company acquired certain assets of several affiliated
contract staffing firms through the Company's wholly owned subsidiary DSI-Staff
Rx, Inc in exchange for $200,000 in cash and a promissory note for $1,300,000.
In addition the Company incurred approximately $636,000 in costs associated
with this acquisition. The Company recorded goodwill of approximately
$1,766,000, which is being amortized over 20 years. The acquisition was
accounted for under the purchase method of accounting.
In March, 1995, the Company issued 360,000 shares of its common stock which was
valued at $743,000. This was used to satisfy part of the aforementioned
promissory note. The balance was paid in cash.
In January, 1995, the Company purchased certain assets of Physicians Unlimited
for $46,000 in cash. This acquisition was consolidated with DSI-Staff Rx,
Inc. which compliments the business by staffing physicians in the medical
field. The cost of the acquisition is being amortized over 20 years.
Page 8 of 14
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In May, 1995, the Company, through its subsidiary, DSI Staff
Connxions-Southwest, purchased certain assets of an employee leasing company
located in El Paso, Texas, Turnkey Services, Inc. The assets acquiered include
the customer lists and all owned and leased assets utilized by Turnkey in its
business operations subject to interest of equipment lessors. In consideration
for the assets and noncompetition agreements, the Company paid to Turnkey
$784,000 in cash and issued common stock in the amount of $166,000. In
addition, the Company expects to incur an additional $200,000 in transaction
costs for a total price of $1,150,000.
NOTE 3: NOTES DUE FROM OFFICERS
In March, 1995, certain officers exercised 523,532 stock options from the
Management Options Plan for a total purchase price of $556,000 at an option
price of $1.0625. In exchange the officers issued a one year promissory note
for the total purchase price at 8% per annum, secured by the shares purchased.
NOTE 4: SUBORDINATED DEBT
In January,1995, the Company completed a private placement offering to
accredited investors of units consisting of a $50,000 principal amount
convertible subordinated note and a warrant to purchase 5,000 shares of the
Company's common stock. The exercise price of the warrant is $2.59 per share
which was the price of common stock at the date of the offering. The notes bear
interest, to be paid semi-annually, at 12% per annum. Unless redeemed, the
notes are convertible at any time from the first closing, at the option of the
holder, into such number of shares of common stock as shall equal the principal
amount of the note divided by 70% of the average closing bid price for the
thirty consecutive trading days immediately preceding the date of conversion,
subject to certain anti-dilution adjustments.
Total proceeds of $1,887,000 were used in part to re-pay the Company's
promissory note issued in connection with the Staff-Rx acquisition previously
reported as well as the Company's working capital requirements.
NOTE 5: SUBSEQUENT EVENT
On July 27, 1995, the Company's stockholders approved an increase in the number
of "authorized" shares from 20 million to 40 million. This was requested to
provide the Company with 'contingent' shares required to collateralize
prospective debt financing for acquisitions and working capital needs.
Page 9 of 14
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NOTE 6: COMMITMENTS AND CONTINGENCIES
The Company has entered into a new Worker's Compensation minimum premium
agreement with a nationally recognized insurance carrier. As part of this
program, the Company will share in any 'claims not paid' pool. As a result of
this arrangement, Management will reduce costs for its workers' compensation
expense periodically, by estimating expected claims against premiums collected
and establish a reserve for unpaid claims. This reserve is periodically
reviewed by the Company's risk management department and the carrier and
adjusted based upon the claims information available.
The Company recently re-negotiated its line of credit with a major New Jersey
bank which increased its credit line to $3.5 million collateralized by the
Company's accounts receivable. The additional credit line was used to fund the
working capital needs of the Company and the acquisition of Turnkey Services,
Inc. mentioned in Note 2.
Page 10 of 14
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's operating revenues for the three months ended June 30, 1995 and
1994, were approximately $19,841,000 and $10,849,000, respectively. For the
nine months ended June 30, 1995 and 1994, revenues were $52,468,000 and
$26,335,000, respectively. These revenues represent an increase from prior
period of approximately 83% for the quarter and 99% for the nine month period.
This increase is primarily the result of; increased revenues in the payroll
service division; internal growth in the northeast operations in employee
leasing and contract staffing; and the full year impact of certain acquisitions
in the employee leasing business in the southwest United States. The increase
is also attributable to the incremental revenues related to the acquisition of
the business of Staff Rx. completed in December, 1994 and Turnkey Services
completed in May, 1995.
Direct costs as a percentage of sales were 91% for the three month period ended
June 30, 1995 compared to 92% for the same period in 1994. For the nine months
ended June 30, 1995 and 1994, the direct costs as a percentage to sales was 91%
The decrease for the quarter reflects the incremental increase in revenues for
those divisions that carry a higher gross margin including the acquisition of
the business of Staff Rx and Turnkey Services.
Selling, general, and administrative expenses as a percentage of sales were 8%
for the quarter ended June 30, 1995 versus 7% for the corresponding quarter in
1994. On a year-to-date basis, the percentage to sales is 8% and 7% for 1995
and 1994, respectively. The percentage increase reflects management's plan to
add additional skills and resources to the Company's management team and to
expand the marketing and selling program. Among other things, the Company
retained a new president, chief financial officer and PEO Executive whose
salaries are reflective in the increase in administrative expenses. In
addition, the Company incurred one time charges of approximately $30,000 in
connection with aborted acquisition attempts.
Interest expense, for the quarter ended June 30, 1995 and 1994 was $100,000 and
$29,000, respectively. For the nine months ended June 30, 1995 and 1994,
interest expense was $227,000 and $55,000, respectively. This increase is
attributable to the interest paid on the increased borrowing under the line of
credit and the accrued interest on the subordinated debt discussed in note 6.
These borrowed funds were used to fund the acquisitions indicated in Note 2 as
well as funding the internal growth of existing businesses.
Page 11 of 14
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Net income for the quarter ended June 30, 1995 was $146,000 as compared to
$144,000 for the comparable period in the previous fiscal year. For the nine
months ended June 30, 1995 and 1994, net income was $668,000 and $575,000,
respectively.
Income before taxes for the quarter ending June 30, 1995 was $85,000 as
compared to $51,000 for the comparable period in the previous year, an increase
of 67%. For the nine months ended June 30, 1995 and 1994, income before taxes
were $686,000 and $282,000, respectively, an increase of 143%. This increase
is reflective of improved gross margin performance in the payroll service
division, an increase in administrative fees for the employee leasing
businesses and the acquisition of the business of Staff Rx, Inc. and Turnkey
Services as indicated in note 2.
Liquidity and Capital Resources
The Company's working capital at June 30, 1995 was $1,424,000 or a ratio of
1.21 to 1.0 versus working capital of $1,146,000 or a ratio of 1.45 to 1.0 at
September 30, 1994.
The decline in working capital reflects the increased use of current
capital to fund the acquisition of Turnkey Services, Inc as indicated in
Note 2.
Total debt has increased due to the acquisition of the business of Staff
Rx, the issuance of subordinated debt and the increased use of the line of
credit.
The Company had net income for the fiscal year ended September 30, 1994 of
$720,000 and shareholders' equity of $5,056,000. For the nine months ended June
30, 1995, the Company reported a net profit of $668,000 and shareholders'
equity of $6,968,000.
The Company is currently seeking to raise subordinated debt through private
financing in order to improve working capital and fund future acquisitions.
page 12 of 14
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Forms 8-K.
Item 27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, the Company filed an amended 10-Q for
March, 1995 on the acquisition of Turnkey Services, Inc.
Page 13 of 14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL SOLUTIONS, INC.
(Registrant)
/s/ RAYMOND J. SKIPTUNIS
---------------------------------------
Raymond J. Skiptunis
Chief Executive Officer
/s/ KENNETH P. BRICE
---------------------------------------
Kenneth P. Brice
Chief Financial Officer
Date: September 28, 1995
Page 14 of 14
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EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
5
3-MOS
SEP-30-1995
APR-01-1995
JUN-30-1995
285,000
0
6,036,000
123,000
0
8,327,000
2,885,000
1,984,000
11,379,000
6,903,000
1,887,000
14,000
0
0
6,968,000
16,379,000
0
19,841,000
0
18,141,000
1,547,000
20,000
100,000
85,000
(61,000)
146,000
0
0
0
146,000
.01
0
